CPF: Economist says tax reform – I say overhaul?

It states that “If a rich man contributes S$100 to his Central Provident Fund (CPF) account, he could get up to S$22 in income tax relief. In comparison, a person drawing S$3,000 a month would only get S$2 in relief.

Pointing out these extremes in potential savings by different income segments, Singapore University of Social Science economist Walter Theseira said in a forum on Oct 20 that the Republic’s CPF contribution tax relief policy should be reformed to troubleshoot the “regressive nature of CPF contributions”, where those who earn less contribute a greater fraction of their income to society than high earners.

The bottom half of Singapore’s households gets 14 per cent of all CPF tax relief subsidies, while the top 10 per cent of households gets 31 per cent in subsidies, according to Dr Theseira’s calculations.

Altogether, these subsidies cost the Government approximately S$1 billion annually in tax revenue, which is “a substantial amount” when compared with the Silver Support scheme’s estimated cost of about S$350 million, the economist said.

While the Government could justify the S$1 billion spending on subsidies as a nudge for citizens to save for their retirement through CPF, Dr Theseira asked: “If the subsidies are removed, what other retirement policies could (the S$1 billion) support?”

He proposed that the Government implement a “credit system” where taxpayers get the same amount in income tax relief regardless of which income bracket they fall into. These credits can be used to pay the tax on one’s CPF contributions or be used to offset another tax.

“Credits are inherently, potentially neutral (versus) a tax relief (system that is) tied to marginal tax rates, (where being bumped up an income bracket) increases the market value of a relief subsidy,” he said.

In response to TODAY’s queries, a spokesperson from the Ministry of Finance (MOF) said that it is “indeed possible” to find some specific parts in the tax system which “may not be as progressive”.

But Singapore’s overall taxes and transfers system is “progressive in design”, she added, citing that low-income households received almost S$4 of benefits for every dollar of tax paid last year, versus the S$2 of benefits middle-income households got for the same tax contribution.

Other examples include the S$1 billion a year the Government spends on the Workfare Income Supplement scheme (granting up to S$3,600 yearly to every worker with a gross monthly income of S$2,000) and the Silver Support scheme (up to S$750 in payouts quarterly for seniors whose CPF contributions did not reach S$70,000 by the time they were 55) to supplement the retirement savings and incomes of the less well off.

Interest rates on CPF balances are also tiered, with higher rates on the first S$60,000 of CPF balances.

All in all, “we achieve progressivity in our social policies from the implementation of various programmes and schemes throughout a person’s life stages”, said the ministry spokesperson. “The CPF is a key pillar of Singapore’s social security system, and works alongside highly subsidised home ownership, education and skills training, and health and medical services. Additional help for the less well-off come in the form of Workfare and Silver Support.”

Nevertheless, the spokesperson said they will continue to consider inputs such as that from Dr Theseira in their regular review of policies.

Dr Theseira agreed that the social policies were progressive, as a whole, but said a review of the CPF tax relief “would be a good opportunity to continue to further improve progressivity and rebalance tax revenue especially in light of the fact that the Government has already made an expensive commitment to help the poorest Singaporeans in old age through Silver Support””.

My comments on the above from an overarching perspective are as follows:-

1) The Government should stop making money from the people’s CPF by keeping part of the returns derived from our CPF, as no other Government does so. From a cashflow perspective – the Government does not spend any money on our CPF system, as it is essentially the people’s own contributions

2) Being transparent on CPF Life’ actuarial assumptions, computations and projections – by making public all the actuarial studies and reports that have been done – may enable the monthly life annuity to be indexed for inflation – the real return on our CPF is probably the lowest of all national pension funds in the world, since 1999

3) Giving the actual historical average returns derived from investing our CPF, may enable all Singaporeans to have more CPF to withdraw at 55 – the real rate of return on the Ordinary Account was very low (less than 1%) for much of the decade or before around 2013

4) GIC managed CPF funds – is the return from inception more than 6%?

5) Giving GIC’s historical average return to CPF members may enable more people to meet the Full and Basic Retirement Sums – currently it is estimated that only about 1 in 7 Singaporeans at age 55 can meet the Full Retirement Sum in cash, without pledging property

Keep accumulating huge surpluses?

6) Spend more to help particularly the lower-income by accumulating less surpluses which arguably were much derived originally, and still currently from our CPF – our Budget surplus using IMF fiscal reporting guidelines was about $20 billion against the Budget surplus of $5.2 billion

7) If we focus on and track the cashflows – we may be the most implicitly taxed people in the world from the perspective that our CPF contribution rate of up to 37% of income is the highest in the world, and

Lowest government spending in the world?

according to the Economist (Sep 27, 2014) – “(in) Denmark, government spending runs to nearly 60% of GDP. More diverse America allocates just 39% of GDP to government, in polyglot Singapore the figure is just 14%”.

So, why is our government spending on the people, apparently one of the lowest in the developing and developed countries?

Pay the most, get the least?

From a cashflow perspective, we arguably pay the highest taxes in the world (taxes, indirect taxes, highest CPF contribution in the world (akin to social security and insurance taxes in other countries), implicit tax by paying the lowest real pension returns in the world, and receive relatively the lowest social benefits. On top of this, from a cashflow perspective, we are not spending a single cent on CPF, HDB or healthcare.

About the Author

Leong Sze Hian has served as president of 4 professional bodies, honorary consul of 2 countries, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been a radio talkshow host, a newspaper daily columnist, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), invited to speak more than 200 times in over 30 countries, CIFA advisory board member, founding advisor to the Financial Planning Associations of Indonesia and Brunei. He has 3 Masters, 2 Bachelors degrees and 13 professional qualifications.